see the attachment. please finish the requirements of module 4-5,

Go to www .cengage.com/accounting/rittenberg for the Ford and Toyota materials. Source and Reference Ford 10-K Ford 10-K and Toyota Annual Report or 20F Question 1a. What are the key revenue cycle accounts for Ford? What accounts involve "critical accounting estimates"? 1b. What does Ford say in Footnote 2 about its use of accounting estimates? What risk do these estimates pose for the auditor? -- -------- 2. Compare Ford and Toyota's footnotes on finance receivables. What is the audit firm's responsibility regarding the informativeness of the disclosures? 3. Use the financial ratios provided in the appendix of Chapter 8 for Ford and Toyota. What are the ratios most relevant to the revenue cycle? Why? Ford 10-K 4. Ford lists a variety of risk factors associated with its business. Review those and identify which relate most to the revenue cycle. What evidence might the auditor gather to understand how those risks may affect the financial statement line items associated with the revenue cycle? Ford 10-K 5. Read Ford's "Management Discussion and Analysis" section titled "Key Economic Factors and Trends Affecting the Automotive Industry." What are the main points that Ford management raises regarding its ability to generate revenue and profits in the near term? What does their statements imply about the risks associated with auditing Ford Motor Co.? 593 Module Ill: Control TestingSales Processing In this module you will apply attribute sampling to Biltrite's prenumbered sales invoices to evaluate whether sales have been processed properly. Recall from Module II that several deficiencies in the design of the controls suggest an increased likelihood of material misstatement. However, the audit team believes that the use of prenumbered sales invoices and the related requirements (agree invoice to bill of lading and customer invoice, agree prices on invoice to master price list, agree calculations on invoice, and agree that customer balance is within authorized credit limit) is an effectively designed control activity and the audit team would like to rely on that control. Accordingly, the audit team has decided to test sales transactions to see whether this control activity is operating effectively. If the control is operating effectively, the audit team would be able to reduce the assessed level of control risk for the relevant assertions related to sales and accounts receivable, thereby enabling them to decrease the extent of accounts receivable confirmation and other substantive procedures related to the revenue cycle. Specifically, you want to determine whether the control related to sales invoices is performed effectively. Knowing whether the control is operating effectively will help the audit team determine whether all recorded sales were shipped (existence of sales) and whether all shipments were invoiced and recorded at appropriate amounts (completeness of sales). As discussed previously in the case, invoices are mailed to customers prior to shipment; therefore, customers may have received invoices for goods never shipped. Also, in the absence of prenumbered bills of lading, goods may have been shipped but never billed to the customer. The second possible processing problem is that customers may have exceeded existing credit limits without home office knowledge; you need to test the degree to which this has occurred. Finally, because of lack of input editing, the prices, customer number, and/ or product number may be incorrect; you will test for this as well. Derick has asked you to complete the sampling plan worksheet that he began earlier. He has defined the sampling unit as the prenumbered sales invoice, and the relevant attributes as 1. Bill of lading attached and signed by the carrier; 2. Product prices in agreement with master price list stored in computer; 3. Extensions and footings correct; 4. Quantities and product type in agreement with customer order; and 5. Customer balance within the authorized credit limit. The population for attribute sampling purposes is the numenc file of sales invoices. During 2009, 22,400 sales invoices were processed, with document numbers ranging from 10610 to 33009. For each sales invoice number drawn at random and included in the sample, you will request the client to supply the invoice/bill oflading packet and the corresponding customer order. The sales invoice/bill of lading packet can be obtained from the numeric file maintained in CBIS. The customer order, the number of which appears on the face of the invoice, is stored in the computer and can be printed out on demand. You then will examine the documents for the above attributes. 594 Module IV: MUS Sampl.ing- Factory Equipment Additions Requirements 1. 2. Based on the deficiencies in the design of controls identified in the sales processing subset of the revenue cycle, does the above sampling plan test address all relevant financial statement assertions related to sales and accounts receivable? If not, which assertion(s) are not considered in the initial plan, and how could the plan be adjusted to address these assertions? Using the spreadsheet program and downloaded data, retrieve the file titled "Attrib." Using the sample size and sample evaluation tables in Chapter 8 and the following data, complete the attribute sampling plan worksheet (in using the "Sample Results Evaluation" table, select the sample size that is closest to your sample size): a. A 5% risk of assessing control risk too low has been decided on for all attributes; b. Misstatements have been defined, and expected deviation rates set for each attribute as follows: 1. Bill of lading not attached to packet-1 % 2. Incorrect prices-1 % 3. Extension and/or footing errors-0.5% 4. Quantities and/ or product type not in agreement with customer order-1% 5. Customer balance exceeds authorized credit limit-1.5% c. Tolerable deviation rates of 4% have been set for all attributes; and d. The following misstatements were discovered in examining the sample: Sales Order Number Misstatement 12511 15439 Bill of lading not signed by carrier Invoice causing customer to exceed authorized credit limit Bill of lading missing Bill oflading missing Bill of lading missing 18616 23468 27891 3. 4. Print your completed document. (You will need to compress print size or otherwise accommodate a wide document.) What conclusions can you draw based on your completed sampling plan worksheet? What impact might your findings have on the substantive audit programs for Biltrite? Based on the results of your testing, should the aggregate materiality threshold be changed for any part of the revenue cycle? Module IV: MUS SamplingFactory Equipment Additions Module IV may be completed after either Chapter 10 or Chapter 14. Check with your instructor. Richard Derick has asked you to develop a sampling plan to determine the extent of misstatements in classifying expenditures as repairs and maintenance expense or factory equipment additions. Given the problems noted during control testing (as described in Module II), Derick believes that significant misstatements may have occurred. The same vendor's invoice frequently contains charges for parts and supplies as well as equipment, and the Biltrite employees preparing the vouchers sometimes fail to distinguish among the charges and simply indicate "factory 595 596 Chapter 10 Auditing Revenue and Related Accounts equipment" as the debit if the invoice amount is large. Inasmuch as this type of misstatement would cause an overstatement in the factory equipment account, Derick instructs you to use MUS sampling to determine the extent to which such misstatements have occurred during 2009. Of the total debits-$89,860,000 to factory equipment during 2009-major additions in the amount of $77,260,000 have been made to replace worn-out equipment. Derick has decided to audit the major additions in their entirety and sample the remainder. Requirements 1. What is the objective of performing this test? What is the sampling unit? What is the population? 2. Using the spreadsheet program and downloaded data, retrieve the file labeled "MUS." Locate the following documentation in the file: WP 11.3A-Monetary unit sampling plan; WP 11.3B-Monetary unit sampling plan-projected misstatement; and WP 11.3C-Monetary unit sampling plan-computed precision and upper misstatement limit. Scroll to WP 11.3A,"Monetary Unit Sampling Plan." Calculate sample size and sampling interval assuming Derick has set the following parameters: Risk of incorrect acceptance: Anticipated misstatement: Tolerable misstatement: 5% $100,000 $640,000 3. What factors did he consider in setting these parameters? Print the document. 4. Scroll to WP 11.3B, "Monetary Unit Sampling Plan-Projected Misstatement." This document summarizes all invoices containing posting errors and calculates the projected misstatement. Note the equations that have been incorporated into the document template. a. What factor determines whether a "tainting percentage" appears in column 4? b. Print the document. (Compress print size or otherwise accommodate a wide document.) 5. Scroll to WP 11.3C, "Monetary Unit Sampling Plan-Computed Precision and Upper Misstatement Limit." Complete the "Incremental Allowance for Sampling Risk" schedule by ranking the projected misstatements as appropriate. (Hint: If you forgot how to do this, refer to Chapter 8.) 6. Print the document. 7. Explain the meaning of the following amounts: a. Basic precision; b. Incremental allowance for sampling error; c. Allowance for sampling risk; and d. Upper misstatement limit. 8. Evaluate the sampling results. Do they support Derick's concerns regarding possible material misstatement? Note the audit adjustment based on misstatements discovered while examining the sample. Is this adjustment adequate to bring the population into acceptable bounds? If not, what alternate actions might you choose to pursue, based on the sampling results? Module V: Accounts Receivable Aging Analysis Module V: Accounts Receivable Aging Analysis Richard Derick has asked you to review the accounts receivable aging analysis and the allowance for doubtful accounts and to recommend any audit adjustments or reclassifications you consider necessary. Shelly Ross had prepared the aging analysis and the allowance for doubtful accounts document before being temporarily transferred to the Joplin Mills audit. She should be back early next week, but Derick would like to "wrap up" accounts receivable this week. Based on the aging analysis prepared by Ross, you have decided to confirm all large accounts and a sampling of the smaller accounts, using positive confirmations. Requirements 1. 2. 3. 4. 5. Using the spreadsheet program and downloaded data, retrieve the file labeled "AR." Locate the following documentation in this file: WP 3-Accounts and notes receivable-trade WP 3.A-Accounts receivable aging analysis WP 3.C-Allowance for uncollectible accounts Scroll to WP 3.A, "Accounts Receivable Aging Analysis." a. What proportion of the total dollar amount of accounts receivable have you included in your confirmation requests? b. What procedures should you apply in the event of no reply to a request for positive confirmation? c. What is the purpose of analyzing subsequent collections? Based on your analysis of subsequent collections and the results of the confirmation process, are you satisfied that you have sufficient evidence to evaluate the existence and valuation assertions? Draft the suggested Reclassification Entry A. Scroll to WP 3.C, "Allowance for Uncollectible Accounts." a. What type of correspondence would you examine to satisfy yourself as to the accounts receivable write-offs? b. Draft the suggested Audit Adjustment 2. Are you satisfied that the balance in the allowance is adequate after your recommended adjustment? c. Scroll to WP 3, "Accounts and Notes Receivable-Trade" (lead schedule). Post Reclassification Entry A and Audit Adjustment 2 to the appropriate locations in the lead schedule. Print the documents 3, 3.A, and 3.C. LEARNING OBJECTIVES The overriding objective of this textbook is to build a foundation with which to analyze current professional issues and adapt audit approaches to business and economic complexities. Through studying this chapter, you will be able to: 1 2 3 4 5 Describe the activities, accounts, and assertions included in the payment and acquisition cycle. Describe the approach an auditor would take to perform an integrated audit in the acquisition and payment cycle and distinguish that approach from the traditional, nonintegrated audit. Identify risks to reliable financial reporting in the acquisition and payment cycle and discuss relevant fraud considerations in the acquisition and payment cycle. Describe how to use preliminary analytical procedures to identify possible misstatements in the accounts and assertions related to the acquisition and payment cycle. Describe wl,y il b i111urlc111L fur Lite auditor Lo develop an understanding of internal controls, identify controls typically present in the acquisition and payment cycle, and identify tests of controls used to test the effectiveness of controls in this cycle. 6 Describe the substantive audit procedures that 7 8 9 10 11 should be used to test accounts payable and related expense accounts and assertions in the acquisition and payment cycle. Explain the complexities inherent in auditing inventory and cost of goods sold. Identify risks to reliable financial reporting associated with inventory and cost of goods sold. Describe typical internal controls over inventory and cost of goods sold. Describe the substantive audit procedures that should be used to test inventory and cost of goods sold. Apply the decision analysis and ethical decisionmaking frameworks to situations involving the audit ot the acquisition and payment cycle, including the inventory and cost of goods sold accounts. CHAPTER OVERVIEW In this chapter, we present a general discussion of risks and audit approaches related to the acquisition and payment cycle and the inventory accounts. In terms of the audit opinion formulation process, this chapter involves Phases Ill and IV, that is, obtaining evidence about controls and substantive evidence about accounts and assertions in the acquisition and payment cycle and for the inventory accounts. Auditors must consider the possibility of fraud when auditing these areas given the many frauds that have taken place through acquisition schemes and in accounting for inventory. 598 Module V Accounts Receivable Aging Analysis By: Ernst & Young 1a. What proportion of the total dollar amount of accounts receivable have you included in your confirmation requests? Of the $11,920,028 accounts receivable balance, confirmation requests were sent out for accounts that totaled $9,803,430, or 82.24% of the accounts receivable balance. 1b. What procedures should you apply in the event of no reply to a request for positive confirmation? In the event of no reply for a positive confirmation, we would resend the confirmations and consider calling the customer to encourage them to reply. If this does not work, we would perform alternative procedures that are intended to verify the existence and valuation of the receivable. These alternative procedures would include: analyzing subsequent receipts to determine if amounts collected were related to sales after the confirmation date; examination of supporting documents to determine if there are documents that support the uncollected invoices, which includes internal copies of sales and shipping documents as well as external shipping documents and bills of lading (AU 330.31 and 330.32). 1c. What is the purpose of analyzing subsequent collections? To determine if amounts collected were related to the balance as of the confirmation date. 2. Based on your analysis of subsequent collections and the results of the confirmation process, are you satisfied that you have sufficient evidence to evaluate the existence and valuation assertions? I am not satisfied that we have enough evidence to evaluate the existence and valuation assertions. While we did receive confirmations for 21 out of the 30 that were sent out, the 21 represented less than half of the value of the accounts that were to be confirmed (40.15%). The 9 confirmations that were not confirmed made up more than half of the value of the accounts to be confirmed (42.10%). Many of the high balances were unable to be confirmed by the customer, and therefore, we must examine the related invoices and shipping documents to determine if any actual items were shipped and the sales existed. # of Value to be Confirmations confirmed Received Not received % of Value Average value to be of confirmed confirmation 21 4,785,554.00 40.15% 227,883.52 9 5,017,876.00 42.10% 557,541.78 30 9,803,430.00 82.24% 3. Draft the suggested Reclassification Entry A. Accounts and notes receivable -trade Accounts payable 190,485 190,485 To reclassify credit balances in accounts receivable as current liabilities 4a. What type of correspondence would you examine to satisfy yourself as to the accounts receivable write-offs? We would ask to examine any notes receivable that the client may have with the customer who's accounts are to be written off. We would also try to confirm the note with the customer, including the balance due, interest rate, date of the note, date due, and any collateral pledged. 4b. Draft the suggested Audit adjustment 2. Are you satisfied that the balance in the allowance is adequate after your recommended adjustment? Bad debt expense Allowance for doubtful accounts 4c. 380,000 380,000 Scroll to WP 3, \"Accounts and Notes Receivable-Trade\" (lead schedule). Post Reclassification Entry A and Audit adjustment 2 to the appropriate locations in the lead schedule. Module IV MUS Sampling - Factory Equipment Additions By: Ernst & Young 1) What is the objective of performing this test? What is the sampling unit? What is the population? The objective of performing this test is to determine the extent of misstatements in classifying expenditures as repairs and maintenance expense or factory equipment additions. The sampling unit is dollars. The population is $12,600,000. 2) Calculate the sample size and sampling interval assuming Derick has set the following parameters: Risk of incorrect acceptance - 5%; Anticipated misstatement - $100,000; Tolerable misstatement $640,000. The sampling interval = 160,000 The sample size = 79 3) What factors did he consider in setting these parameters? The design of an MUS sample requires the auditor to determine (1) detection risk, (2) tolerable misstatement (based on materiality), and (3) expected misstatement in the account balance. The use of detection risk as sampling risk in an MUS sample is based on the view that non-sampling risk has been reduced to a negligible level. 4) What factor determines whether a \"tainting percentage\" appears in column 4? If the book value of the sample is less than the sampling interval, than the tainting percentage is zero. If however, the book value of the sample is larger than the sampling interval, than the tainting percentage is equal to the (book value - audited value)/book value. 5) Please see Spreadsheet 6) Print the Document 7) Explain the meaning of the following amounts: Basic Precision - The upper misstatement limit when no misstatements are detected in an MUS sample; computed by multiplying the sampling interval by the reliability factor. Incremental allowance for sampling error - A provision for additional sampling error when misstatements are detected in an MUS sample. Factors are determined from tables derived from the underlying sampling distribution. Allowance for sampling risk - The difference between a sample estimate and the projected population characteristic at a specified sampling risk. This allowance is also the difference between the expected error rate and the tolerable deviation rate. Upper misstatement limit (UML) - The maximum dollar overstatement that might exist in a population, given the sample errors noted, at the specified level of detection risk. 8) Evaluate the sampling results. Do they support Derick's concerns regarding possible material misstatement? Note the audit adjustment based on misstatements discovered while examining the sample. Is this adjustment adequate to bring the population into acceptable bounds? If not, what alternate actions might you choose to pursue, based on the sampling results. The sampling results DO support Derick's concerns regarding possible material misstatement. The audit adjustment given in the supporting documents is not adequate to bring the population into acceptable bounds. I would suggest Derick use the results found during the MUS sampling to create the correct entry required to bring the accounts to acceptable bounds